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Cost Benefit Analysis

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The Cost Benefit Analysis is an approach that focuses on calculating whether an investment benefits exceed the costs. That is, it's a detailed and conscious approach that companies make to know if an investment will be worth it or not " thinking about ROI, return on investment ". In this way, decisions can be made so that they aren't hasty, but right.

Real examples on which to base a cost-benefit analysis

When analyzing the situation in which a company is, it always helps to see the cases of other companies that have found themselves in the same situation. In the following sections there are examples of cases of companies in which you can see when it has gone well and badly, and why.

Positive case of a cost-benefit analysis

A construction company of 120 employees doesn't have a document management system. This type of companies manages a large number of documents and, although they have them in a database, due to the large volume and the versions that each one creates, there is great chaos and it's very difficult to find " the appropriate version " of the document.

If that company, 50 employees were to use the system, you could see how useful it could be. If employees could find documents instantly or perform operations automatically, it would save a lot of time. Therefore, if 50 employees were saved 20 minutes a day, working about 220 days a year, the company would save approximately € 130,000 per year.

Seeing it this way it may sound very tempting to want to acquire a document management system. But this cost of euros per year hasn't been discounted the costs of implementing a software.

The first year of a software always has a higher cost due to the development, customization, training, consulting, adjustments, necessary hardware,... and that without counting licenses, maintenance and support. In addition, consecutive years must continue paying the license fee, support and maintenance.

To these expenses must be added a possible increase in the number of licenses and / or functionalities. Keep in mind that the greater the number of functionalities, capacity and specific elements required, the greater the cost. All this without counting that it's necessary to spend enough time of the management and the employees so that the implementation goes well.

Therefore, if a document management system is implemented that costs € 80,000 in the first year " apart from possible hardware costs " and 20-30% of that initial budget in subsequent years, the company saves about € 130,000 per year, That's a good investment. However, if the system required would cost € 110,000, the benefits that would be derived from the implementation of such software could be seen as insufficient.

Therefore, before looking for a solution, it's important to establish the situation in which the company is currently located, what you want to achieve with the software and how and, last but also very important, how much is the maximum that you would be willing to spend implementing it and that it would be profitable.

Guidelines for a cost-benefit analysis

When making a cost-benefit analysis, it's important to study what tools the company has at that time, what it would like to improve and if it could be done with a small extension or customization of the current tools. If it could not be done with what the company has, then it would be convenient to investigate what solutions there are to end those countries.

In addition, if such customization or improvement only serves one department, it would be necessary to assess the extent to which it's worth investing in software for a single department. This really only pays off when something very specific is required, such as an accounting module, quality document management, payroll for human resources or even inventory management for some logistics companies.

Therefore, it's advisable to follow some guidelines when you have to analyze the cost-benefit of a solution:

1. Discover the pain

It's known as a " pain point ", or pain point, to the process that takes a lot of time and / or added complexity within a company. For example, when a company that has more than 100 clients leads customer relationship management with an Excel. In this case, it may be that those who have to work with Excel have difficulty finding a document or data from a client.

Another case, it could be that of a company that has outsourced payrolls and discovers that it could save some money if they took payrolls internally. There are as many types of pains as companies, since each company is a world. Therefore, it's important to discover what should be improved in the company.

2. Study the current situation

Once you know what country the company has, you have to do two things:

- See how the pain point is being dealt with today and see what business processes it influences.
- Make a Blueprint IT of the software you have in the company.

A Blueprint IT is a map of the processes and software solutions that you have in the company. In this Blueprint you have to add both the features that are currently contracted and those that could be added.

It may be the case that a company has a pain in its inventory management and has an ERP contracted with the accounting, finance and purchasing modules. If the inventory management module can be added to the ERP software, this could be one of the possible solutions. If the current ERP didn't have the option of adding an inventory management module, other possibilities would have to be weighed.

3. Compare alternatives

When you have all the information about the points to improve and the current situation, it's time to see how you can deal with it. The different general alternatives can be summarized in four:

- Modify business processes: when analyzing the situation and the problem, it's concluded that the problem can be solved with a readjustment of the business processes.
- Expand the functionality of some software that already exists: when a readjustment isn't enough and you have a software to which you can add functionality. This extension of functionalities allows to have this extension for a fairly reduced cost and without having to carry out an entire implementation.
- Acquire a new software: when you can't solve or with a readjustment of the processes or with the software you already have, you can consider the implementation or migration of new software that can meet those needs and requirements.
- Do nothing: when it's not worthwhile to readjust business processes or acquire functionality " or it's not possible to afford it ".

It's very important to write down which options are best for pain and what are the advantages and disadvantages of each alternative to better assess what to do. The options put up there are the most general alternatives. That means that there are other countries that can be solved in other ways, for example, by outsourcing a service " such as payroll ".

4. Evaluate the costs

When valuing the different alternatives, a company may conclude that the software alternatives are the most tempting. In this case, it's advisable to make a list of the costs implied by the current situation as what would imply the increase of functionalities or a new system. Comparing the 3 alternatives of the previous section, you can see better what each cost.

As for the types of costs, there are both tangibles and intangibles:

- Tangibles: are those costs that can be accounted for. In this category are expenses such as: hardware, training, licenses, development, maintenance, support, etc.
- Intangibles: those costs that come indirectly and can't be calculated. Some of these costs are: personal and customer satisfaction, quality, etc.

5. Analyze the benefits

Not all that has to be assessed are the costs. Sometimes, a larger initial investment ends with even greater benefits. As in calculating the benefits that could be derived from each alternative, there are both tangible and intangible benefits.

See the case of a company in the telecommunications sector. These types of companies usually have 2-3 weekly selection processes. That means that they receive a large number of curricula that have to study, store and treat according to the current data protection policy. In addition, these resumes can be received for the same process or for different processes through several different channels " LinkedIn, Indeed, InfoJobs, Infoempleo, or even from your own website ".

Without a tool that helps them manage these selection processes, a technician may be wasting a lot of time with duplicate and even triplicate curricula; or treating curricula poorly in accordance with the data protection law, causing a large fine to be paid; Among other disadvantages.

In this case, an implementation of a selection and recruitment module can result in a much higher cost benefit.

6. Consider the viability of the company

In this section, when talking about viability, we don't just refer to the economic one. A company may have the monetary resources to acquire new software or make modifications to the one it already has, but not have the technical or organizational capacity to carry it out.

A company might think that by having economic viability to do so, it could acquire the other types of capabilities. However, then, it would be necessary to add in the cost part what such changes would entail. The technical capacity can be solved by hiring someone who can take care of it or a hardware that's needed, but perhaps with that extra investment no longer compensates.

In terms of organizational capacity it's a bit more complicated. To achieve organizational viability, you don't have to make only an economic investment, but also time. Each company has its culture and its way of proceeding and changing these characteristics, even minimally, it takes a lot of time and effort.

There are also cases in which a company has technical and organizational feasibility, but not economically enough to start the readjustment or implementation on its own. In this scenario, the company has 2 options: the first, wait until you can do it on your own and continue as is; and the second is with external help: either with a loan from a bank, with an external investor or with a grant from the regional, national or European government.

7. Report and action plan

In this last step a summary of the information analyzed above is made and an action plan is established. Depending on whether the benefits outweigh the expenses and are prepared at an economic, technical and organizational level, you can start with the implementation project.

If you're not prepared, it's not worth the investment or, simply, with a readjustment of the processes is enough, an action plan must also be created. An action plan has a series of steps to follow:

- Define objectives: these objectives were already thought during the study of the countries. However, in this section you have to define objectives so that they are measurable, attainable, real and set a deadline. An example of this may be wanting to keep an analytical control of financial activity and saving time, since with the Excel table they can't have such an analysis and take a long time.

- Detail the strategy: it's the path to be followed to achieve these objectives " either organizational readjustment, updating and adding functionalities of the current software or a software implementation or migration ". In the case of financial analytics, it may be, for example, that the ERP's finance functionality and / or analytical reports with business intelligence " BI " be implemented; that a specialized finance module be acquired; that more staff be hired;

- Pose the tasks: at this time you have to define the tasks that are required to develop the strategy. If you're going to talk to the provider of the tool you already have to see what it offers and compare it with what others offer. If you're going to perform a migration or an implementation, know if you need to buy some hardware as servers. Also, if a document management system is to be acquired, add the task of digitizing all those documents to be added. Study the amount and type of licenses that will be required and a mapping of workflows, among many other tasks.

- Develop a Gantt chart: a Gantt chart is a tool that serves to have an overview of the time allowed for each task. In this way, you can have this information in a more visual way of the total time it'll take to carry out the strategy.

- Designate responsible: a person can't handle a whole strategy alone. That's why, sometimes, you'll have to delegate certain tasks to others. To help when it comes to knowing what to delegate, there are those who follow Eisenhower's matrix. When it's known what tasks are going to have to be delegated, the person in charge can be better chosen based on the skills required to carry out the task.

- Execute the action plan: once you have all the above, it's time to get down to work. Whether you have decided to stay the same, make a small improvement or customization, or even an entire implementation, this is the time to do it.

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